One observation has followed me through nearly every stage of my career: The companies with the greatest resources to pursue strategic innovation frequently become the least comfortable doing so or, in some cases, overly confident in doing so.
At first glance, that cautionary approach makes little sense. Successful organizations possess experienced leadership teams. They generate healthy cash flow. They attract talented employees. They have earned the confidence of investors and customers alike. Logic suggests those advantages should encourage ambitious thinking. Experience suggests something different.
As organizations mature, they become increasingly skilled at producing predictable results. Budgets improve. Near-term forecasts become more accurate. Operating disciplines strengthen. Managers learn how to reduce variation throughout the enterprise because reducing variation usually improves performance.
Success reinforces those behaviors year after year. Eventually they become part of the organization’s culture. That culture serves the existing business remarkably well. Strategic innovation, however, introduces a very different environment.
Two Very Different Management Teams
I have generally encountered one of two management responses to the risk involved with strategic innovation.
The first situation develops inside organizations performing exceptionally well. Revenue continues growing. Customers remain loyal. Shareholders are satisfied. Management sees little reason to pursue opportunities carrying significant uncertainty when the existing business continues producing attractive returns.
In the second situation, executive teams are overly confident because of the success they have enjoyed. A senior executive, often the CEO, develops a compelling new vision for the future. Questions about uncertainty are dismissed or receive comparatively little concern because the originator of the vision is convinced with 100% certainty that the vision is absolutely right. In other words, uncertainty is viewed as minimal. The opportunity promises substantial growth. The organization becomes energized. Conversations quickly shift toward implementation, market potential, and future success.
These circumstances differ. While neither organization desires high levels of uncertainty, the first organization simply avoids it. The second becomes convinced that it does not exist.
Why Executives Struggle with Managing Uncertainty
In the first case, it is important to understand that if an opportunity already possessed reliable forecasts, established operating procedures, proven technologies, and predictable customer behavior, it would no longer represent strategic innovation. It is, instead, incremental innovation where management is simply extending an existing business model into adjacent territory. Breakthrough opportunities emerge long before that level of certainty exists.
For those executives that tend to avoid uncertainty, they spend much of their professional lives looking for ways to reduce uncertainty. Financial controls, operating reviews, planning systems, performance measurements, and forecasting systems all contribute to making the business more predictable. Those disciplines deserve enormous credit for creating successful organizations. They also shape the way many management teams learn to think.
Strategic innovation, however, refuses to cooperate with that expectation. It doesn’t fall in line with that way of thinking because, by definition, it involves heading into uncharted waters with the potential that it could fail overall. Its future cannot be audited. It cannot be precisely forecasted.
The reason this creates such difficulty lies in human psychology. Daniel Kahneman and Amos Tversky demonstrated that people experience losses much more intensely than equivalent gains. Their research explained something many executives recognize immediately when they see it inside their own organizations.
Managers protect success. The larger the existing business becomes, the more attention it demands. Careers become intertwined with current performance. We have heard senior vice presidents tell their staff, “I am only going to be in this position another two to three years. Don’t screw it up.” In addition, compensation is usually structured around annual results. Shareholders and stock analysts expect near-term consistency and success. Every incentive encourages preserving today’s business success rather than exploring tomorrow’s possibilities.
Nobody consciously decides to become risk-averse. The change develops gradually. Each successful year reinforces the management practices that made it possible. Eventually, those practices become assumptions about how every important decision should be made.
Innovation begins by asking different questions. Instead of asking whether next year’s forecast can be achieved, leadership must consider possibilities extending well beyond today’s business. Instead of relying on historical experience, decisions begin to involve circumstances the organization has never encountered. The familiar relationship between analysis and certainty weakens considerably. Many executives simply find that transition to be deeply uncomfortable.
The Sure Thing Vision
For those executives that develop a major vision, the situation is different. They are convinced that there is little to no uncertainty involved with a strategic innovation opportunity. This comes about through one of two ways.
The first is when they have so much confidence in their vision that they think it cannot be wrong. One can say that this comes about through an overconfidence in their ability to foresee the future.
The second way this comes about is when the visionary executive has their staff perform extensive analyses of the potential vision. That staff may initially look at various scenarios and project different probabilities for different potential futures. While it may start out looking at multiple scenarios, it eventually gets funneled down to the executive’s exact vision.
How to Address Uncertainty
Throughout my career, I have become increasingly uncomfortable with the expression calculated risk. The phrase suggests that uncertainty eventually disappears if management performs enough analysis. More detailed financial models create additional confidence. More sophisticated forecasting appears to produce better answers. Precision creates the appearance of eliminating uncertainty.
Reality, unfortunately, behaves differently. Much uncertainty remains beyond the reach of analysis because it involves a potential future that is different than the historical experience of the management team.
For that reason, I have always preferred thinking in terms of measured risk. Measured risk begins by accepting uncertainty as a natural characteristic of strategic innovation rather than treating it as evidence that the opportunity should be rejected or ignored. That single shift in perspective changes the executive conversation. Management stops looking for certainty to be derived from extensive analysis and moves toward experiential actions that actively reduce the risk.
It starts by analyzing all the risks and identifying the ones that can cause the initiative to fail. Those become the risks that the organization begins to attack, begins to de-risk. Carefully designed experiments and other actions designed to reduce the uncertainty help identify the right path to success. That path is rarely the path that was originally envisioned.
The distinction may appear subtle at first, but it is not. It fully recognizes that major risks cannot be calculated, cannot be analyzed up front with a great deal of certainty, cannot be forecast.
I believe it represents one of the most important differences between organizations that consistently produce strategic innovation and those that struggle whenever uncertainty arises.
Every executive claims to value innovation.
The more revealing question concerns their relationship with uncertainty.
That relationship determines which opportunities receive serious attention, which opportunities quietly disappear, and ultimately which organizations continue shaping their industries while others spend their energy defending yesterday’s success.
